Friday, August 30, 2013

Some weeks ago, the Spanish government unveiled
its package to reform the electricity sector with the main objective of ending the
tariff deficit. This arises as the difference between the regulated costs of
the electricity firms and the revenues obtained through regulated tariffs paid
by consumers. Its volume, 28 billion euros by the end of 2012, highlights the
main regulatory problems of the Spanish electricity sector. The tariff deficit is the result
of bad past regulation (controlling the prices without reflecting underlying
costs) and constitutes an enormous distributive problem. According to experts
Natalia Fabra and Jordi Ortega, the remuneration of renewal energies has been
the scapegoat of the tariff deficit. Fabra argues that “the reform places the
burden of the cost of adjustment mainly on renewal energies and consumers, and
leaves untouched conventional energy despite the fact that its
over-remuneration is in the origin of the tariff deficit. The new legislation
does not define a regulatory framework that is able to face the challenges of
the electricity sector.” The new regulation alters the remuneration of
investments in renewals that have already been made. The reform leaves intact
the current electricity market and the remuneration of conventional energies
(nuclear, hydro, coal and natural gas). Truly
reforming the electricity sector amounts to solving together efficiency issues
(allocative efficiency and energy efficiency), income distribution and
environmental challenges. Europe has given too much discretion to member
states, as argued by another expert, Juan Delgado, and Spain keeps using this
discretion in a way that is inefficient, distributionaly regressive and
environmentally reckless. Final prices should be related to real costs by
introducing capacity markets and incentive regulation of the network elements. A
reasonable reform should favour the entry of new competitors and the
integration of European markets and commit to objectives of financial and
environmental sustainability and energy efficiency. The process of reform has
been characterized by debates behind close doors and ministerial disputes. Transparency
has been absent, as opposed to what happens in countries with better regulatory
systems, where a a white paper, stakeholder participation, and input from
an independent regulator (for example evaluating the alternatives) would have been
conventional. However, at the same time, the Spanish government is abolishing the independent energy regulatory agency.

Thursday, August 29, 2013

The Economist had a few issues ago a revealing piece on the excessive influence of business people into politics. Starting with the takeover of Italian politics by Berlusconi (and its disastrous effects), it goes on to survey the many ways in which large corporations influence the political arena. The conclusion of a pro-free market magazine as The Economist is clear: there is too much influence of large business on politics. Big firms are obviously necessary in a developed economy, especially when they perform in competitive and well regulated markets. However, their excessive influence in the political process is a corruption of democracy. One way they try to do so is by appointing former politicians, to try to gain access to policy decisions that impact their bottom line. Of course, former politicians have a right to be hired by large corporations, but these appointments should be subject to strict codes of conduct that are nowadays absent. However, some former politicians (such as two former prime ministers and several former economics ministers in Spain, who are in the boards of energy firms which they used to regulate) should reflect about the embarrassment they inflict in their political parties and former voters. And some companies should think twice about some of the low quality politicians they appoint. Although firms not always succeed to influence policy fully in the direction they desire, it is obviously not surprising that it is difficult from local media to follow the responsibilities that business people have of many bad social and economic outcomes, and it is not surprising that in many developed economies large firms pay a very low effective corporation tax. Large corporations are one of the great institutions of modern economies, but societies at large should reflect more about what is their role in bringing about good societal outcomes. If a business friendly magazine as The Economist says that business has too much influence on politics, the truth is probably even more serious.

Sunday, August 25, 2013

Although
it
has become fashionable to quote “Why Nations Fail” by Acemoglu and Robinson,
as the standard explanation of why institutions matter in economic
development,
there are better sources in my view to understand the role of
institutional
factors and its interaction with preferences and economic behavior. That
is why
I am re-reading the books by Masahiko Aoki ("Toward a Comparative
Institutional Analysis") and by Samuel Bowles ("Microeconomics") and
finding that they mention authors that I have been reading for other
reasons between my first reading and the current one, such as Basu and
Allen. Bowles and Aoki have in
common that they offer a game theoretic view of institutions, which is
presented as a critique of, and in dialogue with, standard economic theory.
Both of
these authors present their view of institutions as a platform to
initiate the
reader in the foundations of evolutionary economics. They also show interdisciplinary science at its best, namely not as an excuse to reduce rigour, but as an encouragement to find better mathematical models and other scientific techniques, such as evolutionary and agent-based modelling. A common theme is
that
economic outcomes are not necessarily the result of human design, but
often
they are the unintended consequences of human behavior, which does not
exclude
the role of collective action. Aoki is especially illuminating when he
presents
his view of social reality as a set of domain games (commons, social
networks, exchange,
organizations and polity) and how the linkages between these domains
create
complementarities. For example, the free rider problem in the
contribution to
public goods may be alleviated by the threat of social ostracism in a
game of
social interaction. All of this is better grounded in social (and other)
sciences
than “Why Nations Fail”, but it is slightly more complex, which is why
you will
not see it mentioned in the popular media. But I plan to teach it in my
courses
(more than I have done so far).

Wednesday, August 21, 2013

I like to
follow events in those countries where I have lived for a while or to which I
feel attached. One of them is Italy (the others are the UK, Chile and the US). I try to keep updated reading everything
on Italy in the Spanish media, and also in The Economist. But my preferred
method is to read every Sunday the column by Eugenio Scalfari in La Repubblica,
the newspaper that he founded some time ago. I like many things from Scalfari,
like his attention to economic details, must most of all I admire his firm
commitment against populism and corruption, and in favour of a federal Europe
(the state should be Europe and national governments should sooner rather than
later evaporate in a borderless Europe). The good news from recent columns is
that Berlusconi has very difficult his return to politics, and that finally it
seems that the forces of democracy and justice are prevailing and it is very
unlikely that the blackmail of Berlusconi has any chance of having any real
bite. Is democracy finally defeating populism and corruption? That is what
Scalfari seems to imply. He believes that the Partito Democratico, in spite of
his divisions, still has enough human assets to sustain a solid government
under prime minister Letta, and that the centre right will have to realize that its future lies in reforming itself to become a respectable European centre-right instead of a clan under the ownership of a corrupt tycoon who once decided to vertically integrate into politics instead of contracting out favours from corrupt politicians.

Thursday, August 15, 2013

If you have
a few days to read a substantial novel, “Freedom” by Jonathan Franzen
is a rewarding experience. The story of the Bergklund family is a portrait of
the USA in the George W. Bush years and the beginning of the Obama
administration. This matters, because the story of the relationships between
husbands and wives, between parents and children, is set against the background
of a political landscape where the relationship between money and politics is
bitterly criticized. The power of the wealthy families is shown in the well
connected Jewish family that is “explored” by Joey Bergklund, or the failure of
the grandparents of the family to
support her daughter (Joey’s mother later in time) because the rapist was the
son of a family that funded liberal causes. The use individuals that have
everything material make of freedom and the competition between them to have
fulfilling lives is the topic of the book. Being a portrait of contemporary
America, depression is perhaps in too many places, and perhaps there is also
too much demonstration of the author being well versed in things such as mobile
messages, social networks and e-mails. But it is a page turner. And take your
time to read the final pages until the end: it is a nice ending.

Tuesday, August 6, 2013

There is no doubt that the economic, financial and monetary crisis that
Europe has suffered in the last few years has exacerbated inequalities and
calls for a reaction that facilitates a return to equitable growth. A European federal state, rather than a European inter-governmental Union, is
necessary to achieve the triple objective of: 1) coordinating progress towards
economic growth and prosperity in the context of more democratic and
transparent politics, 2) making a European-wide effort to achieve higher levels
of income equality through high taxation and a modernized welfare state, and 3)
contributing to protecting the environment and tackling climate change by
putting a price on emissions, and promoting under the leadership of a coordinated
public sector at European level a new industrial revolution based on green
energy.

Statist solutions are no longer sufficient to solve the problems of a monetary Union, and risk making Europe irrelevant relative to the other international and emerging powers.

As Olaf
Cramme argues in the book “After the third way. The future of social democracy
in Europe”, “social democracy must not
underestimate the power of European integration at a time where the phenomenal
pressures of globalization and far-reaching societal transformations are asking
profound questions of all traditional political ideologies. At some point, a
movement, initiative or policy idea will capture the attention of the wider
European public. The center-left ought to make sure that it is part of it.”

Friday, August 2, 2013

Baumol and his co-authors explain that the cost disease
takes place because “progressive industries” experience above average
productivity growth, and “stagnant sectors” experience below average
productivity growth due to the irreducible amount of labour they require. The amount of labour in personal services is constant, but the workers cannot earn much less than workers in "progressive industries" (otherwise they would not accept working there). Many
stagnant sectors, for technological reasons, are in the public sector, which is one reason why the costs of
public sector activities keep increasing. The good news is that because on
average the economy’s productivity increases, we have more resources to afford
a more expensive public sector. The products and services from progressive
industries become cheaper (think of computers, mobile phones, electronic
appliances, but also agricultural products, which in this sense are
“progressive”), so that societies tend to spend more on stagnant sectors (health, education) than
on progressive ones. Unfortunately, that this cost structure is affordable for
society overall does not mean that it is affordable for everybody, and there
are distributive consequences of some groups not being able to afford cost
increases. These distributive implications are most worrying. Another caveat is
that activities with negative externalities also belong to the progressive
industries, like weapons construction and distribution or polluting activities
that produce climate change. Therefore, it is cheaper now to produce bad things. The condition for the affordability in general of
a more expensive public sector is that the economy’s productivity keeps
increasing at the rate of the last century. Baumol thinks that this is most
likely. Let’s hope that he is right.